What is Chain Banking?
Chain Banking is a form of banking when a small group of individuals control three or more banks which are independently chartered. Individuals secure enough stocks to get the controlling interest in the banking corporations involved. The management can also be established via a board of directors that can effectively create a network and undertake supervision of banking activities. Chain banking systems took shape in USA around 1925 when 33 chains were co-existing having ownership of 933 banks. The purpose was to maximise profit and goodwill in the market. The banks which entered into chains within a community, had little scope of competition from other banks operating in the same area. The investors ensured that each bank in the chain catered to the interests of different segments in the market so that there was no overlapping of interests and the returns were not compromised. There is generally no holding company to control the interests of banks. Thus, the underlying principles of chain banking are:
- A small group of persons own and control a number of independent banks
- Each bank carries its operations independently without any external interference by any holding company.
- Every member of the chain retains its independent identity.
Key Features and relevance of Chain Banking
Chain banking at the time of its growth and emergence offered amazing services to the customers due to targeted approach, to the investors in form of consistent returns and complete control. The investors made sure that there was an optimum utilization of resources which will maximise the profits and potential. It provided for quick decision-making due to centralised and unified control which trickled down to customers in form of efficient service. However, the system lost significance with the introduction of more liberal banking laws as the banks which were part of chains opened more to offer more services to their customers. On the other hand, chain banking introduced non-flexible controls and risk of speculations. There were cases of maladministration and frauds.